Transformer-based CoVaR: Systemic Risk in Textual Information

2026-02-13

Technology Category

• Natural Language Processing: Safety and Robustness
• Machine Learning: Calibration & Uncertainty Quantification
• Reasoning under Uncertainty: Relational Probabilistic Models

Application Category

• Search and Retrieval-Augmented AI: Web evaluation methodologies and metrics
• Semantics and Knowledge: Methods to enhance, augment, integrate or synergize semantic models such as knowledge graphs and LLMs
• Web Mining and Content Analysis: Large pretrained models with web data

Abstract

Conditional Value-at-Risk (CoVaR) quantifies systemic financial risk by measuring the loss quantile of one asset, conditional on another asset experiencing distress. We develop a Transformer-based methodology that integrates financial news articles directly with market data to improve CoVaR estimates. Unlike approaches that use predefined sentiment scores, our method incorporates raw text embeddings generated by a large language model (LLM). We prove explicit error bounds for our Transformer CoVaR estimator, showing that accurate CoVaR learning is possible even with small datasets. Using U.S. market returns and Reuters news items from 2006--2013, our out-of-sample results show that textual information impacts the CoVaR forecasts. With better predictive performance, we identify a pronounced negative dip during market stress periods across several equity assets when comparing the Transformer-based CoVaR to both the CoVaR without text and the CoVaR using traditional sentiment measures. Our results show that textual data can be used to effectively model systemic risk without requiring prohibitively large data sets.

Problem

• CoVaR
• systemic risk
• textual information
• financial news
• Transformer

Innovation

• Transformer-based CoVaR
• textual embeddings
• systemic risk
• large language model
• error bounds